1. Copyright © 2015 APEC Secretariat Services, Manufacturing and Productivity 12 May 2015 – ASCC Conference Presented by Andre Wirjo APEC Policy Support Unit

2. Nomenclature of services Global Value Chains (GVCs) Pre-ProductionProductionPost-Production ‘Producer’ services ‘Consumer’ services 1 ‘Embodied’ services ‘Embedded’ services 2 Examples Transport Distribution Accountancy Engineering Research Consulting Prototyping Design Branding Leasing Financing and insurance Repairs and maintenance

3. Capturing contribution of services to manufacturing No.Export channelExample 1 Direct services exports Engineering services provided to manufacturing plant abroad. 2 Indirect services embodied in domestic intermediate goods Research services provided by locally-based company and embodied in domestic intermediate goods. 3 Re-imported domestic services embodied in imported intermediate goods Design services provided domestically and embodied in imported intermediate goods. 4 Indirect services supplied to other service sectors which enter export market in one of the above Telecommunication services used by logistics company which delivers intermediate goods to manufacturing plant for final assembly before export. Source: Wingett (2009) Source: OECD-WTO Trade in Value Added (TiVA) database

4. Contribution of services Source: APEC Policy Support Unit computation based on OECD-WTO TiVA database. Share of services value added has increased for 15 economies and APEC as a whole between 1995 and 2009. By manufacturing sector in APEC, share of services value added has increased for 8 (out of 9) industries and manufacturing as a single group from 1995 to 2009.

5. APEC services backward linkage for different manufacturing sectors in mid-2000s Source: APEC Policy Support Unit computation based on OECD STAN database. A unit increase in a manufacturing sector output would increase output of services sector by between 0.382 and 0.606. Of the total backward linkage, services made up between 15.0 and 23.3 percent. Contribution of services

6. Importance of business services Growth of indirect services exports and value added share in manufacturing Source: APEC Policy Support Unit computation based on OECD-WTO TiVA database. Services value added share (2009, %) Indirect exports (2009, USD billion) CAGR 1995-2009 (%) Construction 1.6118.845.83 Wholesale and retail trade; hotels and restaurants 30.37356.375.99 Transport and storage, post and telecommunication 16.68195.786.41 Financial intermediation 12.87150.996.98 Business services 33.00387.327.40 Other services 5.4764.248.06 By manufacturing sector Business services is the subsector with highest share of export value added in 6 out of 9 manufacturing sectors. Business services increased its value added share from 1995 to 2009 in all manufacturing sectors except in electrical and optical equipment.

7. Importance of business services Growth of services via direct exports and indirect through other services Source: APEC Policy Support Unit computation based on OECD-WTO TiVA database. Direct domestic exports Indirect through other services 2009 (USD billion) CAGR 1995- 2009 (%) Services value added share (2009, %) Indirect exports (2009, USD billion) CAGR 1995-2009 (%) Construction 1.912.312.646.063.34 Wholesale and retail trade; hotels and restaurants 265.166.9714.7333.815.94 Transport and storage, post and telecommunication 197.214.8017.2139.507.00 Financial intermediation 73.507.4318.4542.366.65 Business services 173.858.4637.5486.186.28 Other services 28.637.109.4321.669.75 Business services: With highest direct exports CAGR 1995-2009 (%). With highest value added share in other services in 2009. What are in business services? Real estate activities. Renting activities for machines and equipment. Computer related activities. Research and development. Other business activities.

8. Detailed contribution of business services Source: APEC Policy Support Unit computation based on OECD Structural Analysis (STAN) database. What are in other business activities? Legal. Accounting. Bookkeeping and auditing activities. Tax-consultancy. Business and management consultancy. Engineering services. etc. Other business activities is the top business services in terms of share in mid-2000s for 11 industries.

9. Services and manufacturing productivity Correlation between services value-added in manufacturing and corresponding exports Source: APEC Policy Support Unit computation based on OECD-WTO TiVA database. The higher services value-added are, the higher export capacity are.

10. Services and manufacturing productivity Correlations between services value-added in manufacturing and labor productivity Source: APEC Policy Support Unit computation based on The Conference Board Total Economy and OECD-WTO TiVA databases. Correlations between business services value-added in manufacturing and labor productivity Correlations between labor productivity and manufacturing exports per capita Positive correlations among the variables used to represent services input, productivity and manufacturing output.

11. Source: APEC Policy Support Unit compilation based on various sources. Direct impact of services on productivity Type of servicesExamples of how it increases productivity R&D and engineering Incorporation of new hardware modules. Improvements of testing procedures. Consultancy Introduction of organizational paradigms such as lean manufacturing. Computer Perform “big data” analytics on production floor. Introduction of Internet of Things (IoT). Accountancy Efficient allocation of scarce resources through budgeting. Legal Ensuring adherence to regulatory standards. Indirect impact of services on productivity Type of servicesExamples of how it increases productivity Computer Perform data analytics on customers. Segmentation of market. Leasing Access to products without the need to purchase them. Maintenance and repair Assurance to customers that products would perform optimally. Training Allow optimal usage and hence repeat purchases. Advertising Open acceptance and create demands for products.

12. Manufacturing exports and services restrictiveness Source: APEC Policy Support Unit computation based on OECD-WTO TiVA, OECD Services Trade Restrictiveness Index (STRI) and World Bank World Development Indicators databases. Restrictiveness in services The more restrictive services are, the lower manufacturing exports per capita are.

13. APEC STRI by sector and policy area Source: APEC Policy Support Unit computation based on OECD Services Trade Restrictiveness Index (STRI) database. Restrictiveness in services Main contributors to score for business services are: Restrictions on movement of people. Restrictions on foreign ownership and other market entry conditions.

14. Top restrictions on the movement of people for provision of accounting and auditing services Restrictiveness in services Direct message: More open services trade policies are positively correlated to manufacturing competitiveness Source: APEC Policy Support Unit compilation from OECD Services Trade Restrictiveness Index (STRI) regulatory database with modifications.

15. Restrictiveness in services Indirect message: Need to involve different government agencies 1 Need to explore interconnection between policies 2 Same limitation on stay applies to different business services Example: All shares in accounting firms must be owned by accountants but only locally-licensed people can use the title “accountant”

16. Policy implications and beyond Collection of case studies to understand the value chain of various manufacturing sector to complement research using existing data. Policymakers should be open to a change in perspective when crafting trade policies:  Need to understand how various manufacturing GVCs use and supply services.  Need to raise awareness among manufacturing firms on what should be considered as services. Collaborative and coordinated policymaking across government agencies are necessary in view of cross-agency nature of services and GVCs regulations.